Wednesday, January 09, 2008

Is the Indian Market correlated to the US Market ?

To answer the question above I had to download closing prices for the BSE and the DOW Industrial averages . I indexed the two stock market indices in an attempt to compare apples with apples.
The three graphs represent
1) Long term perspective ( yr 2000 - till date)

2) Medium term perspective ( yr 2006 - till date)

3) Short term perspective ( Sep 2007 - till date).
The correlation values for the above turn out to be 49%,85% and -3%. There is some margin for error as I downloaded the date for the BSE and the DOW there was some discrepancies in dates because of different stock market holidays in India and the US. A correlation of 45% for the long term is good and clearly proves the India growth story. As people around invested in undervalued stocks in india in the early years of 2001-2005 the Indian market moved ahead purely on valuation basis. A correlation of 85% in the medium term indicates that the markets over the medium term have been correlated to a high degree. But the last few months has a correlation of -3%.

This indicates that the Markets are absolutely uncorrelated and are moving in opposite directions over the short term. Can this continue?. It seems that either the Indian market will crash or the US market will have huge bull rally!. The latter is unlikely in the US because of recession fears, credit crunch etc. It does seem that the Indian market has discounted world markets for the moment and Indian investors will likely have to face the realities of globalization.

I believe this quarter is crucial for the Indian stock market and investors must liquidate some of their positions in the Indian markets as it does seem that a big bubble is building up in the Indian stock market